Portugal government battles for survival

Portugal’s leaders scrambled to save their coalition government Thursday after being torpedoed by top resignations over the austerity policies squeezing their bailed-out nation.

Financial markets rallied after Prime Minister Pedro Passos Coelho assured his European partners that he could ride out the storm which erupted after his finance and foreign ministers said they were quitting.

“I am convinced that it will be possible to find the necessary conditions to ensure the stability of the government,” he told reporters in Berlin at a top-level meeting Wednesday on youth unemployment.

The Portuguese stock market’s PSI-20 index showed a gain of 3.04 percent to 5,395.48 points in morning trade on Thursday, after plunging 5.31 percent the previous day.

Pressure on the bond market eased, too, with the Portuguese benchmark 10-year government bond yield sliding to 7.216 percent, having spiked to 8.106 percent Wednesday.

Markets had plunged after Foreign Minister Paulo Portas, who is also leader of the junior partner in the governing coalition, the small conservative CDS-PP party, announced he was resigning on Tuesday.

The news came a day after the shock departure of finance minister Vitor Gaspar.

But the prime minister, desperate to hold together the coalition led by his Social Democratic Party, has so far refused to accept the resignation of his foreign minister and the two have since been in talks.

The prospect of a deal emerged when the CDS-PP leadership asked Portas to meet with the premier to find “a viable solution for the government of Portugal”.

A first round of talks Wednesday evening between the prime minister and his foreign minister were described as “very constructive” by the premier’s office.

They were holding a second round on Thursday morning.

Passos Coelho was reportedly hoping to be able to present a solution for the government to President Anibal Cavaco Silva at a meeting scheduled for 1600 GMT.

Socialist opposition leader Antonio Jose Seguro met with the president on Wednesday and urged him to call snap elections. At the same time, hundreds rallied in Lisbon’s streets calling for the dissolution of parliament in a protest called by the Communist Party.

Reports in the Portuguese press that the agriculture and social security ministers who belong to Portas’ CDS-PP party were also likely to quit were apparently proved wrong when the party said both would stay on.

European Union leaders, fearing a resurgence in tension in the eurozone’s debt-laden periphery, pressed Lisbon to resolve the crisis.

“The political situation should be clarified as soon as possible,” the European Commission’s Portuguese president, Jose Manuel Barroso, said Wednesday.

The government has imposed unpopular spending cuts and tax rises under the 2011 bailout deal agreed with the “troika” of the European Commission, the European Central Bank and the International Monetary Fund.

The austerity measures have plunged Portugal into a deeper recession with higher unemployment than had been expected, sparking mass protests and strikes.

In his resignation letter, Portas said he disapproved of the prime minister’s naming of Treasury Secretary Maria Luis Albuquerque to replace Gaspar. Her appointment was seen as an indication that Passos Coelho intended to push on with austerity despite protests.

“Politically, the turmoil in Portugal is an isolated case with the likely scenario being a reshuffle of the cabinet or early elections, but that’s not the worry in the market,” said Ishaq Siddiqi, strategist at London-based brokerage ETX Capital.

“The big fear is this country has failed to demonstrate economic growth since its bailout and its government has also been unable to meet targets set out by the troika,” Siddiqi added.

“Now, without a stable government in power, investors are concerned Portugal will be unable to meet its debt obligations.”